LCCI is very undervalued, especially in comparison to SCTR:
My rationale is as follows:
About two months ago SCTR (Specialty Teleconstructors announced a merger with a tower management vehicle called Omni-America, which was controlled by a private equity firm, Hicks-Muse).
Prior to the Omni-America merger, at $17.50 share and 8.3mm shares outstanding
SCTR had a market cap of about $145mm. At that point in time, the stock had a P/E of
about 30. Even then, SCTR was very overvalued. They were bascially a domestic only
tower construction firm. The domestic market is a declining market. SCTR's first 2
quarters of 1997 were $29.5mm of sales versus $33.2mm sales in the first 2 quarters of
1996. The business was actually shrinking, and had a huge P/E. This is a bit
unexplicable to me, but it was basically an ineffeciently traded stock with no analyst
coverage and a lot of hype surrounding it, so for whatever strange reason, the high P/E
multiple held up. In their 10-K, SCTR even cites that they are "losing share to turnkey
vendors." This was a business with a very high P/E given its shrinking top-line and
strategic/competitive challenge.
Then they announce the merger with Omni-America. The combined entity now has
about 15.2mm shares outstanding, and at a stock price of $36, has a market cap of
$530mm. The implied valuation of the Omni-America piece is therefore $380mm, which
can be derived as follows: $530mm for the combined entity less $150mm for SCTRs
stand-alone valuation, which = $380mm.
Here is where things get funny. Omni-America consists of tower assets that were
purchased for a sum total of about $115mm ($75mm for original assets plus $38mm for
recent Arch towers). So basically assets that Hicks-Muse bought for $115mm are now
being valued by the people who are paying up for the stock here at $380mm, or
$265mm more than Hicks-Muse paid for them. $265mm divided by 15.2mm shares
outstanding yields $17/share of overvaluation. I also believe that the original SCTR base
business was overvalued by a factor of 2x given it was a shrinking business in the first
2Q's of 1997, and is more appropriately worth about 7x EBITDA, or $70mm. So
$75mm ($145mm original SCTR market cap less $70mm real value) divided by
15.2mm shares outstanding is another $5/share of overvaluation.
In total, I conclude that SCTR is at least $22/share overvalued, and should be worth
about $14 share; directionally near where it was trading before the merger was
announced. Remember, free money is not created. Hicks-Muse is not going to give all
this free money to the public.
By the way, for those of you who think that just because Hicks-Muse is involved with
the deal that the stock will go up, you are making a big assumption. First of all, their
track record relative to Omni-America is already very sketchy (and having buyout firms
involved with a stock is no guarantee of success anyway - RJR Nabisco/KKR,
APSI/Clayton Dubilier, and the list goes on and on and on). The latest acquisition they
did, Arch Communications, is a poor portfolio of assets that they overpaid for. Telecom
Towers previously had a deal with Arch to acquire the same towers for roughly the
same price Omni-America ended up paying. Once they got in a did their due-diligence,
however, apparantly they realized the Arch Towers were a bad set of assets; bad
location and single-tenant capability only. Telecom Towers walked away from the deal.
I have also spoken with another industry source who indicated that his firm bid
$20mm-$25mm for the Arch portfolio and believes Omni-America way overpaid.
For those of you in the stock just because it seems like it keeps going up, remember the
bulletin board hype can't last forever. Remember Iomega, Vivvus, Centennial
Technologies? There is a limit to the amount of time stocks can float above a rational
valuation. Once people realize it, it often turns out to be a selling frenzy. The momentum
seems to have stopped pretty firmly here on SCTR, and I am guessing it only has one
way to go - down.
Now, on to LCC International (LCCI ticker) for those of you who believe in the future
of Tower Management, but would like to participate at a more reasonable valuation.
LCCI is an international RF engineering and tower-site managment firm. LCCI has
18.8mm shares outstanding, and at $21/share has a market cap. of $395mm less
$19mm of cash on their balance sheet yields a valuation of $377mm. They did 155mm
of revenue and $22.3mm of EBITDA last year (SCTR did $65mm of revenue and
$7.8mm of EBITDA last year) and analyst forecast that they should do about $185mm
revenue and $31.5mm in EBITDA this year (SCTR pro-forma may have $20mm in
EBITDA).
LCCI is primarily known as an international RF engineering firm; basically people use
them to engineer and maintain their wireless networks. The beauty of their business is
that about 50% of their revenue is international, which is where all the growth is (like
SCTR, LCC's domestic revenue is relatively flattish as domestic market largely built
out). The international wireless market should grow for a long time to come, and LCCI
should grow right along with it.
For you tower management lovers out there, here is the interesting spin. LCCI started a
tower management business about 1 year ago to leverage their core RF engineering
capability. These guys basically know all the best spots to put a tower since they design
networks. LCCI should have about 200 towers under contract by the end of this year.
The beauty of LCC's towers is that they all have contracts with at least one-tenant
already, and have an enormous amount of upside as their towers are in the best
locations people will want to rent space on them (as opposed to towers with poor
locations like Arch).
I think most people on Wall Street have been unaware that LCC has this tower
management operation because the company is known as an RF engineering firm. I
believe that the management team at LCCI is aware of the value of this hidden asset,
and will seek to unlock it over the course of the next 6 months via a spin-out of some
sort of the tower management business.
Doing the math, they have 200 towers (basically same amount as SCTR, but much
better towers with more upside) that should be worth at least as much as
Omni-America. Then you still have the remaining RF engineering business that analysts
forecast will do $31mm of EBITDA and $.80 EPS this year. Right now you are getting
all this for $377mm versus the $530mm you are paying for SCTR. Something seems
well out of line here. LCCI appears to me to be a huge value here. I think people are
starting to figure that out. Stock has been pretty strong lately (up $2.5 today), but I
suspect it has a long way to go.
That, in a nutshell is my hypothesis. SCTR relatively way overvalued (short); LCCI relatively
very cheap (long).
My opinion. |
